Sugarcane production and water risks; a longer term view

Weather risk in the sugar market is usually seen as coming about when heavy rainfall disrupts crushing – just as we have
seen in Brazil this season.

However, taking a longer term view, the risks invert with the greater problem being constraints on water availability. Cane
sugar production has increased by almost 20% since the 2002/03 season while beet sugar, which is less water
intensive, has increased by less than 1%. However, cane is a water-intensive crop, requiring at least 1,500
mm of rainfall and in the right distribution. As a consequence, the rising proportion of cane sugar production
has increased the world market’s dependence on reliable water supply, which in many parts of the world
is becoming a problem.

Water Availability and Agricultural Expansion

Concerns around population growth, increased urbanization, higher levels of consumption by households and sanitation needs
are also focussed around rising demand for food and water.

This is causing concern that inefficient food production and distorting agricultural subsidies are contributing towards water
shortages.

According to UN sources, agriculture uses approximately 70% of the world’s accessible water every year while in developing
countries agriculture uses as much as 90% of available water.

Moreover, studies by the WWF also indicate that, with the exception of Brazil, many of the largest agriculture producing
countries including the US, China, India and Australia have reached or are close to reaching their renewable
water resource limits.

Demand for water among industry and agriculture will continue to rise as a result of population growth and economic development.

“Sugar cane production is particularly sensitive to water availability, which is likely to dampen the ambitions of many countries
who are seeking to expand their domestic industries. This consequently points towards the need for continued
growth in cane production within Brazil and West / East trade in order to be able to reduce the pressure
on finite water resources faced by many countries in Asia.”
Stephen Geldart, Senior Analyst

What Does Lack of Water Mean for Cane?

In comparison to all other arable crops sugarcane requires high levels of water and also has one of the longest growing periods.

Sugarcane requires between 1,500mm to 2,500mm of annual rainfall with a growing season ranging between a minimum of 9 months
up to 18 months for newly planted cane.

In contrast most competing crops require just 500-800mm of annual rainfall with growing periods significantly shorter at
between 5-6 months.

The development of the cane crop is also very sensitive to water.

For example a shortage of water in the early growth phase can halt development and prove severely detrimental to yield while
rainfall in the final ripening phase results in lower sucrose recovery.

Areas of Potential Growth in Cane Area vs Water Availability

Growth in sugarcane production outside Brazil is largely expected to come from Africa and Asia.

However, production is likely to be constrained since many of these countries are experiencing or approaching physical water
scarcity.

Given that Brazil doesn’t face such long run physical water scarcity risks while production in India and China will be restricted
due to their water constraints, our belief is that this will likely lead to greater West to East trade.

“Water availability is a concern for many developing economies, which face rapid demand growth while lacking the legal framework
and oversight with which to manage water usage. Increasing levels of urbanization and rising levels of
consumption add to these concerns.”
Toby Cohen, Czarnikow Director

Cane, Beet and Water Use of Competing Crops

The three most water intensive crops are cotton, sugarcane and rice.

All three are important agricultural crops and consequently countries that are involved in the production of these crops
are focusing on improving agricultural practices and irrigation techniques.

Cotton requires on average 6.7mm per day of water during its 6 to 7 month growing season.

Cotton accounts for almost half the fibre used for making clothes and textiles. Sugarcane which represents more than 70%
of sugar production requires close to 7mm per day on average and has an even longer growing period
ranging from 9 months in some countries to 18 months in others.

Finally, rice a staple food for more than half the world’s population requires an average of more than 13mm of water per
day during its 5 month growing period.

A Switch From Cane to Sugarbeet?

Sugarcane requires approximately 1,500-2,500mm of annual rainfall distributed across the growth cycle.

Though the growing period varies from 9 months to 18 months, on the average the growing period is 12 months, which can be
divided into 4 stages.

In contrast to sugarcane, beet requires far less amount of water ranging from just 550mm to 750mm on average.

The growing period for sugar beet is also shorter ranging from 140-240 days.

As sugarbeet requires much less water than cane a number of countries have been experimenting with tropical beet as an alternative
to cane.

Conclusion & Quotes

Economic growth is driving demand for fresh water.

This is being led by domestic demand for basic sanitation coupled with agricultural demand in order to increase the production
of foodstuffs to meet the needs of a growing population.

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